cademy  of 


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Reprinted  from  The  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  Publicadelphia,  July,  1915. 

Publication  No.  901. 


^CENTRAL  AND  SOUTH  AMERICAN  TRADE  AS  AFFECTED 
BY  THE  EUROPEAN  WAR 

By  James  A.  Farrell, 


President  of  the  United  States  Steel  Corporation  and  Chairman  of  the  National 
Foreign  Trade  Council. 


The  commercial  interdependence  of  modern  nations  became 
strikingly  apparent  when  the  first  shock  of  the  European  war  halted 
neutral  commerce  as  abruptly  as  that  of  the  belligerents.  Although 
transportation  and  exchange  were  dislocated  in  every  country  of  the 
globe,  probably  no  other  neutral  nations  were  affected  to  so  serious 
an  extent  as  were  the  twenty  Latin  American  republics  to  the  south 
of  us.  Not  only  were  their  business  relations  with  the  United  King- 
dom, France,  Germany,  Austria  and  Belgium  subjected  to  an  ab- 
normal strain,  but  their  commerce  with  each  other  and  with  the 
United  States  was  interrupted  and  is  only  now  beginning  to  resume 
encouraging  proportions. 

The  completion  of  the  Panama  Canal  and  propaganda  in  favor 
of  closer  relations  with  our  sister  republics  are  partially  responsible 
for  the  fact  that  the  American  public  has  developed  a tendency  to 
view  world  trade  in  terms  of  Latin  America,  overlooking  the  fact 
that  the  total  trade  of  the  twenty  republics  with  other  nations  and 
with  each  other  is  but  6 per  cent  of  the  total  foreign  trade  of  the 
world,  and  that  the  Dominion  of  Canada  normally  buys  more  from 


us  than  the  whole  of  Latin  America. 


Educational  Power  of  Varied  Trade 


Those  who,  by  reason  of  their  interest  in  the  greater  consuming 
markets,  may  view  this  attitude  of  the  American  public  with  dis- 


appointment, should  realize,  however,  that  the  study  of  the  many 


^Bonditions  governing  this  trade  and  the  tariffs  and  laws  to  which 
;^it  is  subject  is  rapidly  acquainting  the  general  public  with  valuable 
^knowledge  concerning  foreign  trade  policy.  It  is  needless  to  look 


' beyond  our  Latin  American  export  trade  for  examples  of  the  strength 
and  weakness  of  our  commercial  intercourse  with  all  nations. 


In  gauging  the  effect  of  the  European  war  upon  Central  and 


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The  Annals  of  the  American  Academy 


South  American  trade  and  its  future  development,  it  should  be 
remembered  that  European  investment  has  been  the  chief  factor  in 
the  growth  of  these  nations.  Such  financial  assistance  was  essential 
to  the  development  of  their  natural  resources  and  the  establishment 
of  manufacturing  industries. 

European  Investment 

At  the  beginning  of  the  European  war,  more  than  five  billion 
dollars  of  British  capital  had  been  invested  in  Latin  America;  while 
investments  of  French  capital  were  variously  estimated  at  from  four 
hundred  million  to  one  billion  two  hundred  million  dollars,  and 
German  investments  at  somewhat  less.  British  investments  were 
estimated  to  yield  an  average  annual  interest  of  over  5 per  cent,  or 
two  hundred  and  fifty  million  dollars,  more  than  two-thirds  of  the 
value  of  the  United  Kingdom’s  yearly  imports  of  Latin  American 
products.  In  other  words,  the  Latin  American  natural  products 
imported  for  the  life  and  industry  of  the  British  Isles  were  largely 
paid  for  by  earnings  of  British  gold  invested  in  securities  of  Latin 
American  governments  and  in  the  shares  of  enterprises  in  those 
countries,  such  as  railroads,  steamship  lines,  plantations,  mines, 
manufacturing  industries,  nitrate  fields,  etc.  Moreover,  this  British 
investment  ensured  preference  for  British  exports,  as  a railroad 
financed  in  Great  Britain  was  usually  equipped  with  British  mate- 
rials and  British  mines  were  operated  with  British  machinery,  etc. 

German  investment  was  accompanied  by  still  greater  financial 
influence,  as  the  German  industrial  system  contemplated  the  impor- 
tation of  raw  materials,  their  fabrication  into  a much  greater  volume 
of  products  than  Germany  herself  could  consume  necessitating  a 
wide  export  market  for  the  surplus.  In  accordance  with  the  Ger- 
man policy,  industry  and  finance  were  closely  allied,  various  classes 
of  manufacturers  concentrated  their  resources,  supported  by  the 
great  German  banks  and  upheld  by  a constructive  governmental 
policy  which  molded  diplomacy,  education  and  national  thought  to 
the  extension  of  Germany’s  influence  in  world  trade,  with  the  result 
that  there  was  a steady  advance  in  demand  for  German  goods  in 
Latin  America. 

Each  great  German  financial  group  was  represented  in  South 
America  by  banks  which,  in  addition  to  conducting  a general  bank- 


Central  and  South  American  Trade 


3 


ing  business  for  the  commercial  public,  were  indefatigable  in  their 
efforts  to  obtain  a market  for  products  of  the  mergers  and  coopera- 
tive foreign  selling  syndicates  which  the  parent  banks  in  Germany 
had  helped  to  organize  and  finance. 

Limited  American  Investment 

This  influence  of  financial  Europe  steadily  gained  in  power  in 
every  republic  from  the  Rio  Grande  to  Cape  Horn,  but  its  effect 
was  neutralized  by  American  investment  in  such  countries  as  Mexico 
and  the  chain  of  states  extending  to  Panama  and  the  West  Indies. 
Large  American  holdings  in  mines  and  plantations,  fruit  trade 
investments,  railroads,  tramways,  light  and  power  plants  and  steam- 
ship lines,  coupled  with  our  greater  familiarity  with  the  markets,  a 
fairly  considerable  American  population,  and  the  influence  of  travel 
and  association,  have  combined  to  create  an  equal  opportunity  for 
American  goods  in  the  countries  north  of  Panama  and  in  the  Carib- 
bean. 

Our  exports  to  Central  America  normally  consist  more  largely 
of  highly  finished  manufactures  than  those  to  any  other  part  of  the 
world.  Cuba  is  the  only  American  country  under  whose  tariff  we 
enjoy  a large  advantage.  To  the  ten  Central  American  and  Carib- 
bean republics  and  to  Venezuela,  Colombia  and  Peru,  we  sold  more 
merchandise  last  year  than  did  all  the  rest  of  the  world,  which  is 
sufficient  proof  of  our  ability  to  produce  results  when  supported  by 
helpful  association  and  sound  financial  investment,  in  addition  to 
our  sound  selling  methods  and  high-quality  products. 

Further  south,  the  influence  in  behalf  of  American  export  trade 
steadily  diminishes,  for  the  reason  that  our  South  American  invest- 
ments, except  in  mines  in  Peru,  copper  and  iron-ore  properties  in 
Chile  and  packing  plants  in  Argentina,  are  immaterial;  so,  also,  is 
American  population,  while  European  immigration  has  been  heavy. 
The  importance  to  a nation  of  merchants  residing  in  foreign  coun- 
tries cannot  be  overestimated.  British  and  German  merchants 
scattered  throughout  the  world  conducting  business  as  importers  of 
products  of  their  native  lands  are  vital  factors  in  British  and  German 
oversea  trade,  while  an  American  merchant  resident  in  a foreign 
land  is  an  exception. 


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Effect  of  War 

Even  before  the  outbreak  of  the  war  the  effect  on  Latin  Amer- 
ican markets  of  curtailed  European  investment,  beginning  with  the 
second  Balkan  war,  was  marked.  Dependent  as  new  enterprises 
were  upon  the  selling  of  securities  on  the  British  and  Continental 
bourses,  prosperity  in  South  America  had  long  been  dependent  on 
the  European  money  market,  and  all  industry  and  most  govern- 
ment finance  showed  distress  a full  year  before  the  great  European 
war  began. 

When  hostilities  were  declared,  the  situation  became  the  worst 
in  their  history,  and  moratoria  were  promptly  declared  in  practically 
every  country.  Pending  loan  negotiations  were  halted,  new  con- 
struction was  suspended,  sterling  exchange,  the  almost  universal 
currency  of  Latin  American  trade,  soared  to  unprecedented  heights, 
steamship  communication  was  interrupted,  and  confidence  was  com- 
pletely impaired.  The  demoralizing  effect  of  the  crisis  upon  the 
domestic,  as  well  as  the  foreign  business  of  the  United  States,  is  not 
yet  forgotten;  in  Latin  America  it  was  even  more  severe.  Trade 
between  the  United  States  and  South  America  came  almost  to  a 
halt  and,  even  after  British  control  of  the  sea  restored  transporta- 
tion, the  credit  situation  and  the  difficulties  of  collections  prevented 
the  resumption  of  normal  business. 

Purchasing  Power  Curtailed 

Those  whose  enthusiasm  led  them  to  believe  that,  with  Ger- 
many out  of  the  race  for  trade,  the  United  States  could  immediately 
gain  the  export  trade  formerly  enjoyed  by  that  country,  failed  to 
consider  the  fact  that  Latin  American  purchasing  power  had  shrunk 
by  reason  of  the  curtailment  of  British  investment  and  the  loss  of 
the  German,  Austrian  and  other  customary  European  markets  for 
their  products.  More  thoughtful  exporters  realized  that  the 
mechanism  of  commerce  must  be  restored  before  present  business 
could  be  taken  care  of,  leaving  aside  the  question  of  a greater  future 
trade.  The  disadvantage  of  the  former  custom  of  liquidating 
transactions  in  our  trade  with  Latin  America  at  London  in  sterling 
bills  of  exchange  was  made  apparent,  and  its  excessive  expense  bred 
in  exporters  and  importers  the  desire  for  the  establishment  of  dollar 
exchange  and  direct  settlements  between  this  country  and  southern 


Central  and  South  American  Trade 


5 


markets.  In  the  furtherance  of  this  desire,  the  federal  reserve  bank- 
ing law  is  timely.  Its  authorization  of  the  federal  reserve  banks  to 
deal  in  acceptances  representing  transactions  in  the  export  and 
• import  trade  created  in  each  of  the  great  export  centers  a discount 
market  for  this  p&per,  with  the  result  that  bills  drawn  on  oversea 
customers  find  ready  sale  when  accepted  by  banks  belonging  to  the 
federal  reserve  system,  and  the  extension  of  credits  has  been  greatly 
facilitated. 

Immediately  the  war  assumed  its  present  gigantic  proportions, 
it  was  plain  that  the  purchasing  power  of  Latin  America  had  dwin- 
dled to  the  value  of  its  exportable  products,  and  much  depended, 
therefore,  upon  the  state  of  crops,  such  as  wheat  in  Argentina, 
coffee  in  Brazil,  and  elsewhere. 

Situation  Improving 

Fortunately,  these  crops  were  large  and  foodstuffs  commanded 
unusually  high  prices  in  the  European  market,  with  the  result  that, 
within  the  last  three  months,  trade  has  quickened,  confidence  has 
been  partially  restored,  and  business  is  beginning  to  be  conducted 
“as  usual,”  except  that  all  new  construction  is  at  a standstill  and 
no  extensive  development  is  contemplated  until  the  end  of  the  war. 

A notable  effect  of  the  war  in  our  commercial  relations  with 
Latin  America  has  been  the  increasing  reexportation  of  characteris- 
tic Central  and  South  American  products.  New  York  and  other 
ports  of  the  United  States  are  now  important  distributing  points  for 
international  commerce,  as  shown  by  the  fact  that  exports  of  foreign 
merchandise  for  the  eight  months  ending  February,  1915,  were 
valued  at  $33,166,512,  as  against  $20,541,138  for  the  same  period  in 
the  previous  year.  This  gain  was  especially  notable  in  the  case  of 
cacao,  the  reexports  of  which  increased  more  than  fivefold,  reaching, 
for  the  eight  months  ending  with  February,  a total  value  of  $2,835,- 
591.  The  reexports  of  coffee  leaped  from  $968,530  to  $4,482,368. 
This  was  largely  due  to  the  closure  of  Hamburg  and  conditions 
prevailing  in  other  European  ports,  formerly  the  center  of  the  world- 
distributing  trade.  In  comparison  with  these  old-world  centers, 
New  York  became  the  greatest  open  port.  By  reason  of  restrictions 
placed  upon  the  export  of  rubber  by  the  United  Kingdom,  to  prevent 
its  being  used  by  the  enemy,  the  importance  of  American  ports  for 


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the  distribution  of  India  rubber  greatly  increased,  the  value  of 
reexports  growing  about  80  per  cent. 

Trade  Balance  Adverse  to  United  States 

During  the  eight  months  ending  February  28,  1915,  our  exports 
to  all  Latin  America  and  the  West  Indies  were  valued  at  $159,742,- 
863,  as  compared  with  $212,227,558  for  the  corresponding  period 
ending  February  28,  1914,  a decrease  of  25  per  cent,  while  our  world 
exports  during  the  same  period  decreased  3§  per  cent.  Our  imports 
from  the  same  countries,  during  the  same  period  of  the  present  fiscal 
year,  amounted  to  $316,374,763  against  $289,318,891,  an  increase 
of  9 per  cent,  although  our  world  imports  decreased  13  per  cent. 
This  comparison  shows  a trade  balance  of  $156,631,900  in  favor  of 
Latin  America  and  the  West  Indies,  which  will  adequately  answer 
the  demand  of  those  who  are  urging  us  to  b^y  more  freely  from  Latin 
America,  but  even  in  normal  times,  the  balance  is  in  our  neighbors’ 
favor.  Under  the  provisions  of  the  federal  reserve  law,  we  can 
reasonably  look  for  largely  increased  sales  of  American  products. 

The  reasons  for  this  decrease  in  our  exports  were  the  practical 
suspension  of  commerce  during  the  first  few  weeks  of  war  and  the 
acute  depression  which  followed.  This  decrease  was  noticeable  in 
shipments  of  all  construction  materials,  such  as  iron  and  steel  manu- 
factures, lumber  and  cement,  agricultural  machinery  and  equipment, 
automobiles,  railway  cars,  locomotives,  sewing-machines  and  other 
highly  finished  manufactures,  while  exports  of  actual  necessities 
occasionally  increased,  by  reason  of  the  lack  of  European  competi- 
tion. For  instance,  exports  of  coal,  which,  before  the  war,  except 
to  Central  America,  were  not  heavy,  trebled  to  Argentina,  and 
greatly  increased  to  Brazil,  while  shipments  of  American  paper, 
because  of  the  need  of  replenishing  stocks  and  the  elimination  of 
German  competition,  also  grew  in  volume,  while  inquiries  began  to 
pour  in  for  numerous  small  lines,  thus  increasing  the  diversification 
of  our  export  trade.  At  the  close  of  the  war,  however,  we  will  find 
it  necessary  to  exert  every  effort  to  maintain  this  newly-won  trade 
against  the  determined  competition  of  Europe. 

The  increase  in  value  of  imports  from  Latin  America  is  largely 
due  to  higher  prices  of  various  products,  combined  with  the  fact  that 
trade  routes  have  been  changed  and  New  York  has  become  more 


Central  and  South  American  Trade 


7 


active  as  a distributing  point,  as  shown  in  the  case  of  cacao,  some 
importers  of  the  Ecuadorian,  Brazilian  and  Dominican  product 
expecting  to  see  it  become  the  greatest  distributing  point  in  the 
world.  The  use  of  cocoa  and  chocolate  in  the  ration  of  the  modern 
army  proved  the  salvation  of  Latin  American  cacao  growers. 

The  demand  of  the  European  belligerents  for  foodstuffs  and 
supplies  has  saved  the  situation  both  in  Latin  America  and  the 
United  States.  The  development  of  Latin  America  cannot  proceed, 
however,  without  foreign  capital.  Citizens  of  the  United  Kingdom 
are  forbidden,  during  the  war,  to  invest  in  foreign  enterprises,  which 
eliminates  England,  France,  Germany  or  Belgium,  leaving  the 
United  States  as  the  only  great  nation  whose  trade  balance  is  in- 
creasing and  whose  gold  is  accumulating. 

Source  of  Future  Investment 

That  American  capital  is  educated  to  foreign  investment  is 
proven  by  the  fact  that  its  holdings  in  the  Dominion  of  Canada  are 
nearly  seven  hundred  million  dollars,  exclusive  of  agriculture,  and 
half  a billion  dollars  in  Mexico,  Central  America,  Cuba,  Haiti, 
Santo  Domingo,  Chile  and  Peru.  Since  the  beginning  of  the  war, 
fifteen  million  dollars  of  short  term  Argentine  treasury  notes  have 
been  taken  in  the  United  States,  one  of  the  conditions  of  the  issue 
being  that  the  proceeds  should  remain  in  the  United  States  as  a 
credit  against  the  Argentine  purchases  of  American  merchandise. 
This  unusual  condition  illustrates  the  advantage  of  making  loans 
to  countries  which  can  become  large  purchasers  of  our  products. 

British  investors  are  retaining  #ieir  Latin  American  properties, 
which  will  prove  more  valuable  than  ever  after  the  war,  in  view  of 
their  freedom  from  the  heavy  taxes  which  war  imposes  upon  invest- 
ments in  the  United  Kingdom.  How  important  a part  British 
capital  will  play  in  the  financing  of  Latin  America  after  the  war 
remains  to  be  seen,  but  the  consensus  of  financial  opinion  seems  to 
be  that  interest  rates  will  materially  increase,  and  the  amount  of 
this  increase,  as  compared  with  the  price  of  United  States  loans,  will 
doubtless  determine  the  question  of  who  is  to  be  the  chief  investor 


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Relation  of  Investment  to  Export  Trade 

Of  greater  importance  than  the  interest  rate  is  the  creation  of 
a greater  export  market  for  American  manufactures  through  rail- 
way and  industrial  loans.  By  reason  of  European  investment,  the 
area  into  which  we  can  expect  to  send  American  exports  is  restricted. 
For  instance,  in  view  of  the  fact  that  railways  promoted  by  European 
capital  are  confining  their  purchases  of  materials  to  Europe,  our 
only  field  for  railway  supplies  and  equipment  has  been  the  govern- 
ment railways.  When  the  output  of  American  factories  is  increased 
by  foreign  investment,  the  investment  becomes  in  reality  a domestic 
investment  and  its  encouragement  by  the  United  States  govern- 
ment should  naturally  be  expected.  Upon  this  attitude  will  depend 
largely  the  future  of  American  business  enterprise  abroad.  With 
governmental  support  and  intelligent  cooperation  between  investors 
much  can  be  accomplished,  although  some  hesitancy  on  the  part  of 
capital  may  be  encountered,  owing  to  the  deterrent  effect  of  the 
Mexican  revolution.  However,  the  awakened  interest  of  the  entire 
American  business  public  in  the  possibilities  of  Latin  American 
trade  is  a great  assurance  of  future  increase. 

While  the  establishment  of  dollar  exchange  will  not,  perhaps, 
entirely  replace  confidence  in  sterling  bills  at  the  conclusion  of  war, 
a beginning  has  been  made  for  American  banking. 

Excessive  versus  Adequate  Credits 

Although  much  is  said  in  favor  of  conducting  business  in  accord- 
ance with  the  desires  and  standards  of  our  Latin  American  customers 
we  should  remember  that  this  applies  only  to  what  is  recognized 
by  the  world  to  be  sound  business  practice.  Arguments  in  favor 
of  granting  six,  nine  and  twelve  months’  credit  do  not  recognize  the 
fact  that  extension  of  unusual  credits  was  an  important  factor  in  the 
industrial  depression  preceding  the  war,  Germany’s  eagerness  for 
British  trade  having  led  many  German  firms  to  extend  credits  which 
deferred  merchants’  obligations  several  months  beyond  the  time 
when  they  realized  on  the  purchased  goods.  With  this  ready  money 
at  hand,  the  merchant  frequently  speculated  in  land,  with  the  result 
that  collapse  of  the  land  boom  caused  heavy  losses  and  failure  to 
pay  at  maturity  of  even  these  long  credits. 


Central  and  South  American  Trade 


9 


British  exporters  frequently  voluntarily  suffered  the  loss  of  old 
and  valued  business  in  preference  to  extending  excessive  credits, 
and  Americans  with  experience  in  Latin  American  trade  are  of  the 
opinion  that  the  limit  of  credit  should  be  sufficient  only  to  cover 
the  time  required  by  purchaser  to  realize  on  the  goods  bought, 
taking  into  consideration  the  harvesting  and  marketing  of  crops. 


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